Webinar: The M&A Conversation: How to Prepare for Growth or Exit

Webinar: The M&A Conversation: How to Prepare for Growth or Exit

Buying and selling companies has become a regular activity in the language services market. Whether you are planning to grow your revenue or to retire, it is useful what is the process and how to develop conversations around the value of your business.

Jonathan Otis and Renato Beninatto will discuss the M&A process and what determines the value of a company.

Jonathan Otis, Business Strategy and Growth Consultant

Jonathan has spent the last 25 years as a development executive in the enterprise IT space. Coming to Seattle 20 years ago, Jonathan ran product management, marketing and systems engineering creating and managing products as the company grew from USD 27 million to almost USD 500 million in sales. His focus on integrating new technologies and subsequent work with start-ups and technology partners led him to business and corporate development. Jonathan has closed countless deals with OEM’s like Dell, EMC, HP and IBM, many reseller and alliance contracts and fruitful work managing very large direct customers, some of the largest public cloud companies. He has been instrumental in M&A activity and can’t wait do the same at Nimdzi.

Full Transcript

Hello, my name is Renato Beninatto. And hi, my name is Jonathan Otis. We are here today to talk a little bit about mergers and acquisitions. It’s one of the most hot topics that has been around the language services industry in the last three to five years – if not longer. And I’d like to start with a story, Jonathan. In about 1997, I’d had a translation company for 15 years in Brazil and one day somebody calls me and offers me USD 750,000 for my company. I had 65 employees in Brazil and Argentina. I had a very good client base in 12 countries, and worked mostly with vinyl clients. And I had no frame of reference. When somebody offered me, and I was a USD 1.2 million company at the time. When somebody offered me USD 750,000 cash, I said, wow, that’s a lot of money. You can buy a new car, you can buy a new house.

And remember, this is a 1997. It’s in Brazil; the context is very different. So we signed some documents and after three months of negotiations, and so on, the day before we signed the final document, I got a call from another translation company, a new company that had investors from private equity firms that were investing in the industry. They were outsiders. And just out of curiosity, I asked a the investor, how much would you pay for my company? And he said, well, based on the information that you’re giving us, I would say that I would start at USD 1.5 million. I said, whoa, wait a second, right? And we eventually sold the company for USD 1.5 million and I still think it was too little. And you know why? The challenge was that I didn’t have any help. There was no reference. In 1997, the industry was starting to globalize and this is why they wanted to buy a company in Latin America. And there was no market research. There was no data, there was no real information about the industry. And I was working in the vacuum. I was trying to get information from other types of companies. And I was very happy. It ended up well. I’m here today, but I felt the need of guidance that wasn’t there. So you’ve heard this before.

Jonathan:

02:52

Absolutely. There’s stories all over the place of people that have been approached, they start working on a deal, then they realize how complex it is. They might bring in a friend, a broker, a banker or whatever, and they all tell stories of getting two or three times more once a professional’s in there working with them. So yes, it’s very common.

So we’re in 2019. This year, Nimdzi has helped two companies, two LSPs, one in Canada and one in the United States, get acquired by other larger LSPs. And my goal here today is, since you (Jonathan) are our mergers and acquisition expert, full time working here with us at Nimdzi, to discuss a little bit of the topics that usually happen in this conversation. And let’s make this a little bit of an FAQ, right? Okay, well the first question is why do people sell their companies? Why do they want to sell their companies?

Well, they want to sell their companies because they might be going through a lifestyle change, thinking about retirement and other things. They may be bored. They may be burned out. You see a lot of that. Maybe something is changing in the industry, the technology is changing in the industry, and they don’t feel that they’re experts in the new technology. They don’t feel comfortable with what the changes are, so they feel they need to move on. Also, there could be disagreements with partners. There could be lots of different reasons as to why.

Well, I’ve had disagreements with previous partners and I walked out of a company that I’d had in the past. So that’s a reality. I’ve also seen succession issues, right? So you’re a business owner, you build your company for your children, and then your children decide to be doctors, engineers or go somewhere else and that plan goes down. So it’s, it’s an opportunity to cash out subjects. Right?

There’s also, I think, in larger organizations versus the smaller ones, there’s resource issues. If you don’t have a lot of resources or a lot of expertise, or maybe your managers aren’t truly salespeople, you know, so there’s always that resource issue.

And also capacity, right? You need to increase your capacity. You closed a very big contract. I know of a story of a company that won a big account and they needed to ramp up in Europe very fast, and setting up a company, hiring people was something that was time consuming. It was faster to acquire another LSP and take that as a foundation for growth. In fact, and we can talk about this a little bit later, these are factors that are going to affect the evaluation. So these are reasons why people want to sell. But in a business like this, in mergers and acquisitions, you need a buyer. So why do people want to buy companies?

Well, people are buying companies because they want to grow normally. They want to grow because that’s more revenue. That’s more customers. It might be looking for some technology, but they also are often looking for people. I mean, people are a commodity. Having experienced managers, have experienced program managers and project managers, you know, people need that all the time.

Renato:

6:07

I think that the word that they use now is talent. Haha!

Jonathan:

6:10

Oh, you’re right! Talent. People need talent all the time. They might want to go into a new vertical where, you know, you might be an expert in documentation and so they want to add technical documentation as a vertical. And they might want to expand geographically. Maybe they think they’ve got too much in one area. They want to move in different countries. They want to move across the country. So there’s a lot of that going on.

Yes. And these activities, they happen, and it’s part of a market dynamic, right? So there is constantly this type of mergers and acquisitions are happening all the time. But every once in a while, it’s in a cycle. It’s usually seven, eight years. There is a another boom of mergers and acquisitions and we seem to be at the tail end of one of those where you see all the mid companies being gobbled up by the bigger companies. And that creates an opportunity for the smaller companies to rally up because there is a vacuum that is created in the middle, so they can get together by the more entrepreneurial LSPs will buy other LSPs and fill that middle gap, which is what has been happening over the years.

Right. Transaction size is a big deal. You know, USD 2, 3, and 4 million companies will get bought by USD 50 million companies, USD 10 or 15 million companies will get bought by USD 50 million companies, USD 50 million companies, they’ll get bought by USD 300, 400, or 500 million companies. And that doesn’t change. And those transaction costs are sometimes very similar, but that is how things will come up.

Okay. So we understand why and now the obvious question is how, right? And I realize that I’m going to ask you the question that I’m always being asked as the first question, and that is, ‘how much am I going to get for my business?’ How much am I worth?

It’s always the first question. And everyone has their own formula. There are formulas that we’ll go through, there are process that we go through. We want to see how much money you’re making. If you’re a small privately owned company, how much of your personal expenses are in the business? Is their bank debt? Are there other things? But the things that really determine what the price will be is, are you growing? If you’re a company that’s growing five or 10 percent per year, if you’re a company that is maintaining 80-percent of your customers from year to year, in other words, you’re not having to replace half of them each year before you can even grow a little bit. So if you’ve got good customer repeatability. And if you’re profitable. So if you’re growing, have repeatability, and you’re profitable, you will get a nice multiple for your company.

Well, and the funny thing is that – well it’s not funny at all – but the fact is that people really frequently start thinking about selling when the revenue starts going down. You know that we have our info drops here and one of the info drops that I did very early on (these are short videos that we have in our YouTube channel), I called this info drop “morning prayers.” I’ve been telling this to all my clients over the years, that every morning when you wake up, you have to think about three things. What am I going to do today to grow my business? What am I going to do today to buy another business? What am I going to do today to sell my business? So even if you’re not thinking about selling your business now and today, you should be preparing your business for that moment. If you get an unexpected offer or if you have a, a reason why it would make sense to sell the business.

And even if your revenue was falling, as you pointed out, it doesn’t mean somebody won’t buy you. It will affect the price. It will affect the multiple. But there are people that look for companies that are in that situation versus ones that are growing really fast. And every buyer is very different and everybody, it’s subjective to their own items. I think in this market today, it’s a minimum six month process, probably a 6-12 month process to sell your business. It might happen faster than that. But I think once people look at you, look at your numbers, get comfortable with the idea, go through due diligence.

Renato:

10:42

So what is due diligence? What do you mean by due diligence?

Jonathan:

10:46

Look at your numbers and your operations and your contracts and your people, look at everything very carefully.

So the buyer puts together a team of lawyers, accountants, consultants on their side and they’re going to review all the information that you share. So another tip is don’t try to hide anything. Be up front about your weaknesses because it will come out, and that’s very frustrating. If you’re very upfront with the challenges that you have in your business, and by the way I’d like to say that even companies that are losing money might be interesting for some buyers. Some buyers will want, and this, it depends on, there are many, many variables don’t count on what I’m saying, but there are situations where companies will buy businesses that are losing money for tax purposes because they can reduce, depending on the time of the year, on the type of transaction, they can reduce their taxes and they’re essentially buying a company that is losing money for capacity for a much lower cost. So, even if you’re losing money, that’s not the end of the world. There might be people that are interested in some of the assets that you have, like your client base, your expertise in certain technology. Maybe you are the only one company doing localization in Kabul and there are all of the Kabul engineers are dead. So you have a niche there. Even if you’re not making money.

Yes. So the third question is how much is it going to cost? So I am selling my company, or I’m buying a company. And you are, Jonathan, our broker. So how much do you cost? How much money am I going to spend to sell my company or to buy another company?

I would say the easiest way of looking at it is that it’s similar to selling your house, you know? And even the percentages in the end are very similar to selling your house. It’s a financial transaction. There’s a lot of things that have to happen. In the industry brokers are used to getting a certain amount of money. So it’s a commission. It will be commissioned based on the money that you receive and the total value of the sale. And there’s a formula. It can be a very straight line formula. It could be a variable formula depending on what you’re looking at and how you want to incentivize us. We agree on that formula ahead of time, we sign an engagement letter, which both has this formula locked in stone and it has a timeframe that we expect to be able to work from on this deal.

No, it is similar to selling a house. It’s going to be around four or five percent of the deal. It could be higher than that if it’s a very small deal. It could be lower than that. If certain constraints are made and certain levels are made that’s just variable to each individual deal.

But I think the most important thing, and I think I strive for this, is I want the seller to be comfortable with what that number is. So as part of getting an engagement together, we work carefully on that. We look at different scenarios. We should take a look at the company financials and just understand, is this going to be a USD 10 million deal, a USD 5 million deal or a USD 25 million deal? And that’s going to help us back end a fee structure that the customer is happy with. And I want the customer to be happy. Absolutely. So walk me through,

Absolutely. So walk me through the process. If a client said today, okay, I want to think about selling my company. I’m 57 years old. I’m tired. My company’s running by itself. Where do I start? How does it work?

So you come to us. We would sign an NDA just between the two of us, which protects your financial information and protects this conversation, and we would negotiate an engagement agreement, which includes the term and includes the fee structure and what our goals are. From there, we would collect financial information on the company and prepare documentation that’s sent out to buyers. We do this in a blind fashion using what’s called a teaser, initially. So we send out a teaser that says, Hey, there’s this company that does this. It has this revenue, this many people, it’s in this geographic area and this expertise vertical expertise or customer segments or whatever. We send that out to a group of individuals, or I should say, a group of companies that we know are interested in buying and we see what the interest level is and we get those parties to come back. The parties that are interested come back and sign an NDA between you and them, which then allows them to start seeing your information and learn more about you. And it’s at this point that they’ll even learn who the company is.

Yes, yes. So that’s the key point, right? There is an element of confidentiality. This teaser, and this first level of conversation, is confidential and your employees don’t need to know, and your competitors, you definitely don’t want your competitors to know about it. And the circulation is very limited. So I know that we will send a hundred teasers and get like three or four parties interested, or maybe 10, maybe 10 parties interested. Then, we sign NDAs with three or four. Right? And so there is a process that the broker filters this information so that not everybody is getting this information in the market. And you are protected in one way.

And we know the buyers that are doing lots of transactions, so we know what they’re looking for. So it’s very upfront. And we always report what we’re doing and you can get an update at any time on who we’re talking to and what the responses are coming back and you’re getting requests from me all the time for more data or answering special questions. And once we get that first data passed and they know who you are, we actually try to bring the parties together as soon as possible.

So we need data back for two to three years to show the growth pattern that’s coming up to show the change in customers, to show the change in the organization and how it’s been maturing. And we also need a lot of information about the last 12 months. We have this thing we call the trailing 12 months. So we actually make up a financial statement from wherever we are right at this moment, back 12 months, making that look like a full year. We see what your sales are, what your profitability is and what your growth has been over that period.

Correct. Okay. So that’s the best indication of what your actual performance is at this moment, okay? And as much as they want to see what you did last fiscal year and a couple of fiscal years before that, the last 12 months is really indicative of what’s going on and they’re most interested in that.

Yeah. I would say if there’s one item that can really determine what your value is going to be to somebody, it’s in what we call concentration. And this is, if you look at your customers, how much of your revenue is one specific customer versus your top 10 customers? A lot of times you might have your first customer make up 20 or 30 percent of your revenue. That to you might sound really good, meaning I’ve got this really strong customer, but to the buyer, that’s a risky item because if that one customer was lost, they’d lose 30-percent of the revenue.

Yeah. Well 30-percent is still good. But it can be worrisome. I’m not saying it’s all good or bad, but perhaps if you have 50-percent, or more than 50-percent, of your revenue comes from two or three clients. That might be one of those things that will affect your evaluation, right? Or, and again, this is why it’s so challenging. Maybe a buyer wants to buy you exactly because of that client. You know? We had that situation where concentration was a challenge for the seller, but the buyer was so much bigger than the seller, then all of a sudden that concentration becomes much smaller. It would actually help the bigger entity have less concentration. So every case is a different case.

It’s not the norm in the language industry to have long term contracts. Exclusive contracts are even more rare. But we can, if you have any of those, or you have a contract with the government or with an entity, that is something that gives predictability to future income, correct?

Correct. I think contracts were a bigger item in years past than they are going forward, just because companies have changed their procurement methodologies and their expectations and things like that. We all know it’s harder to get people to be exclusively with you. And people look at gross profit. I think that’s the next one. Gross profit is what drives bottom line profit, but they’re looking at your gross profit – how much it’s costing you to have translators, how much it’s costing you to use third party tools, and other things. And so gross profit is a big indicator of what your operation is like. And that varies, actually, with the type of LSP that you might be, or the type of technology company that you might be. We’re not just talking to LSPs, we’re talking to every kind of company that’s in the language services space. So, we have a lot of technology companies, we have companies that write software or sell software, and have subscription revenue. And so all that is going to be super important – how that revenue is coming in and what your gross profit is.

Absolutely. So this is a very active space in the industry right now. And in my experience, the biggest value is having almost like a coach, or somebody that helps you navigate the process and helps you go through that. So one of the things that I would encourage our viewers today is essentially to reach out to us, to reach out to you, Jonathan, and to myself. We have a document that will be available to download that essentially describes every step of this process. But this is one of the four lines of business that we have here at Nimdzi, and I’m happy to report that it’s a thriving part of our business. And we want to hear from you. We want to hear your questions and see how we can help you buy or sell companies in this space, and to help you with your growth journey.